 Hey everybody, this is episode number 13 of Patterson in Pursuit and today we are diving into economics specifically the foundations of economics really the epistemology of economics, so I wasn't always interested in philosophy proper I got kind of sucked into politics around 2006-2007 Shortly after that I got sucked into economics and I just dove into economics and I love the field I think economics is one of those areas of thought which you really can't overlook if you want to try to understand how the world works But economics then sucked me into philosophy So I only got to philosophy which is really my primary love Through economics and there's a very specific reason why in the world of economics just like any other field of thought There are lots of different schools of thought. There's a different mutually exclusive theories One of these theories is called the Austrian school of economics and it's unique on a number of different levels and one of the unique features of the Austrian school of economics is The methodological claims or the epistemological claims about economic propositions So you might ask what is the status of economic propositions or economic theory or economic law What is the status in the sense that are they empirical hypotheses or are they logically necessary truths and One strain in the Austrian school says they're actually Logically necessary truths that economic theory is a purely deductive exercise now That doesn't mean all of economics is purely deductive But it means the the bones as you'll hear in this interview the bones of economics is purely Logically deductive now if you're not familiar with this school that probably strikes you as a very remarkable proposition and indeed it is So my guest today is dr. Pete Betke who is an Austrian school economist He teaches at George Mason University in Virginia and I've known Pete for several years And I think we have kind of a cool relationship because he is one of the economists who has I think the correct Economic methodology and he's written several books one of which his most recent book is absolutely fantastic It's called living economics, and I'll have a link to it in today's show notes page Steve dash Patterson comm slash 13 definitely pick up a copy of that book. So on the one hand, we're very much close to full agreement in terms of The basics of economics, but on the other hand Pete and I very strongly disagree about academia It's not something we really talk about in this interview, but we've had lots of conversations He's a big name in academia And he has a lot of sway and he wants, you know young people who are interested in the world of ideas to try to sway others by Going through the established Academic system and obviously if you've been following this podcast at all, you know I'm about as far away from that position as possible But I still even that being the case I have a massive amount of respect for Pete Specifically because he has consistently demonstrated that he is a clear and critical thinker even though. Yes He is in academia So if you're not familiar with Austrian economics or economics in general this conversation might be a bit Intense or or too deep or boring But if you're an economic nerd or if you're interested in the topic I think you're gonna get a lot out of talking about the epistemological nature of economic theory So like I said earlier, Pete is a university professor of economics and philosophy at George Mason University He is the BB&T professor for the study of capitalism and the director of the FA Hyatt program for advanced study in philosophy Politics and economics. I hope you enjoy our conversation So first of all dr. Pete Becky. Thank you very much for taking the time to speak with me today No, it's great to be here with you. I have a few questions for you that I'm super excited about One of the reasons I wanted to talk to you in particular is because you have a fairly unique position on economic methodology You take if I may label it this you take a mis easy an approach to Economics and I was I was wondering if you could maybe explain what is unique about Your approach or the mis easy and tradition in economics, maybe versus other methodology methodologies in economics Well, I think you know, there's different ways to slice that I mean there's certain core ideas in economics coming from Adam Smith all the way forward in the classicals to the early Neoclassicals to modern developments in economics and And so, you know depending on on how you take epistemological ideas about where how do we Understand how we got this knowledge. How do we justify it? And then I think you can divide that into very broad brushes between deductive and Empirical approaches so inductive versus deductive and I'm on the Deductive side and I believe that we need to have our theories are in fact prior to our interpretation of the facts And so therefore, you know facts are never these brute things that then we clash our theories against and either reject or fail to Reject our theories what we have is our theories are a prior and the fact theories are like a set of eyeglasses And we put them on and that enable us to read and that that means that we read and understand and interpret the facts That are out there in the world and what happens is the test of our theories is one the internal logic of the theory itself and then two the Applicability of a theory to a particular set of circumstances to help us better understand those circumstances And so we can we don't reject Theories like it's not like say the Austrian business cycle theory is ever wrong Based on the facts or the Austrian argument about socialism is ever wrong based on the facts The theory is wrong whether or not you've proved that the logical chain of reasoning is wrong, right? but it could be the case that a country could call itself socialist not really be socialist, right and And be running around and doing things and then people say oh see but Sweden isn't collapsing due to the economic calculation And it's like well, but Sweden's really not Socialist as according to the theory of socialism that is they haven't abolished private property in the means of production And all that entails and so in that regard I think that the Mises position is the position that I hold which is that All the good classical economists were at the end of the day a prioris Right and early neoclassical economists. It's really in the 20th century after the rise of positivist philosophy and a Version of formalism That we ended up by getting this kind of weird way we do economics now Which is that you build models and then you run them, you know against the data and then you reject or fail to reject your theories And you think that's science, right? I don't think that's at all how we do science and it gets very complicated And then of course there's nuances within the different positions I don't want to say that everyone was a messesian who was on the good side of things, you know But in some broad sense they were and then it becomes very narrow differences But let me give one other example, which is right up your your field of philosophy, which is I think one way to think about what went wrong with economics is that the Principles of critical reasoning are what govern philosophical discourse for centuries okay, and we made a very important distinction in philosophical discourse between sound reasoning and valid reasoning all right and so What sound reasoning was is that if the premises are true the conclusions are true if you engage in the sound reasoning what? Valid reasoning is is it doesn't matter whether or not the premises are true? But you follow the arguments and there's no logical leaps or whatever and What older economists classical economists and early neoclassical economists all the way up to Mises were concerned with Was the idea that you could generate sound reasoning within economics, right? And this is why the arguments were that the a priori theorizing of Mises was not just merely a tautology, right? It actually was kind of these statements that had empirical significance because The premise if the premises are true like say for example the action axiom and the logical chain of the reasoning is correct Then the conclusions are going to be in fact true about the world not just about the model, right? Well, it's really really hard to do that, right? It's it's it's people makes mistakes all the time and so in the 20th century what happened was at the same time that we were developing statistical you know models of statistical significance and Techniques to drive statistical significance. There also was a move to try to say look the greatest Ambiguity in reasoning comes from using the same words to mean different things or different words to mean the same thing So we can't do that with mathematics So what we're going to do is we're going to translate all of our theorizing into mathematics because it makes us state our assumptions explicitly and our models became in some weird sense the reality rather than the reality trying to be the model and So we ended up by all we cared about was validity So the kind of reasoning that formalism gave us Could only give us validity and we didn't care that it didn't give us soundness because among the array of valid theories that we developed we're going to test them Unambiguously supposedly against this data with these new tools. So I'm going to sort out the mess Well, the problem of course is that from the beginning people should have known this from what's called the Duhem coin thesis Which is that the empirical tests even in the natural sciences let alone in the human sciences are not as unambiguous because we don't know when the data is Opposite of what our prediction is from our theory that whether or not what got rejected was the network or one of the particular statements in it, so we don't know the tests are not as Unambiguous as we'd hope so now our testing is not unambiguous and our theories are just valid not sound So that is kind of the the context and some of the theoretical Differentiations, let's bring it to something concrete like the minimum wage So how does this approach to economics view something like the minimum wage? Is it an empirical question whether or not the minimum wage is going to cause unemployment? Let's say well So what you can say is that? Arise in the minimum wage that is set above the market clearing wage So that's a first clause that you have to have so that that minimum wage is in fact binding Right right so if to put it, you know easy if if the market was paying ten dollars an hour For workers already and then you came along and said no worker can get higher for less than five dollars an hour, right? You know that does that's not binding It's when workers are getting paid five dollars an hour And then the government comes in and says you have to pay him ten dollars an hour that you get this bite Right, so that's the first thing we have to do the second thing is is that we have to recognize that it causes Disemployment effect not an unemployment effect now. What do I mean by that? It's just a subtle distinction what that means is that businesses can make all kinds of adjustments on the margins So that are disemployment versus unemployment meaning that they might not let workers off like say like you're not working anymore But what they might do is they might not pay benefits They might not give college funds like think about McDonald's when I was a kid They used to have an employee of the month and that employee of the month was then available for college scholarship They don't do things like that anymore, right because we've raised the cost of Labor and so you might see substitution. This is where you know now you start seeing more disappointment effects Rather than having a cashier. I might end up by getting a computer that I do as a kiosk checkout So I think that we can talk all about those disappointment effects and the multiple margins That are not it's not an empirical question When we talk about magnitudes of effects Those necessarily bring up mag, you know empirical questions, but that's not empirical testing That's empirical illustration and understanding how big is big, you know So, you know the minimum wage was 850 an hour and now the government has made it $9 an hour on the margin We have a disappointment effect, but it's not as visible as if we had $5 an hour the market wage and we raised the minimum wage to $15 an hour. Now we'd see a bigger disappointment effect And again, it's not that the evidence is tested against the theory It's that the theory is used to illustrate the phenomena of what happens when you cause labor to be more costly to hire How capital will substitute for labor all kinds of different adjustments are set in motion And I think that that's how we reason as economists and that theory That you're building is that something so for example if we're talking about disemployment is that you're saying this is Logically necessary result in the real world Well, yeah, I mean again, you know all economic laws are holding other things constant And so there could be all kinds of other things going on with sort of like if I take a feather and I throw it out To this this window it is true that that feather will fall according to the law of gravity But a gust of wind may make it go up and down and so I have to figure out like what are the Alternative so that's why economists always use the phrase holding other things constant and so I think that's important to keep in mind, but it's it's If you are doing sound reasoning not valid reasoning and you do it correctly What you are arguing is going to be what actually is in the world So let's take the example of and that's true. Just just say that's true for you know minimum wages, but it's also true for You know setting price controls on rents, you know rent rent controls You're gonna see this kind of consequences that result from that any kind of market Interference so it tax rates are gonna have certain effect on on you know behavior So if I put a tax on cigarettes, right? It's gonna affect but the magnitude might not be as Great because I'm looking at a good that might actually be relatively inelastic. So therefore it might take you know a huge increase in the tax to offset the behavior So I'm gonna give one contrast so that with the feather falling to the ground In that circumstance, we wouldn't say that it's a logical necessity that in all circumstances when you drop a feather It must go to the ground the law of gravity is something that is contingent It's not something that isn't that different than what we're claiming sure because the human sciences actually have an advantage over the natural sciences In this sense and that is because we have we in the necessity and position But I would argue this goes all the way back is that we have what the ultimate cause is which is that you know human motivation Striving to better our position basically substitute an unsaturated factory state of affairs for a More general satisfactory state of affairs now, you know now, okay, so where economists get Ancy about that kind of stuff in the modern kind of language is because you know Mises was a subjectivist So one of the great advantages to Mises over earlier writers was that he didn't have all these different He didn't worry so much about all these arguments in the utility function, right? And you know, are you maximizing your money? Are you doing this and he said look as a subjectivist you just say people are striving to do the best that they can This is what he meant by proposiveness, right? They're goal-oriented agents They're going to arrange their means as best as they can to obtain the ends that they're seeking But I'm not going to tell you which ends they should be seeking And so as a result Mises is logical structure of the propulsive actor could apply Across the board to a variety of different things even like a religious zealot who you know burns himself at the stake Or something like that or follows superstition or You know a money grabbing, you know capitalist, you know sort of entrepreneur and the logical structure of the Human action model or perspective models the wrong word But is equally applicable to explaining that kind of behavior across the board or Understanding mean all of these terms have a lot of loaded epistemology to them and most average Conversations don't Reflect that loaded epistemology, so I don't want to misstep here I'm just I'm trying to talk in a very commonsensical way And so I would if I was being philosophically a tension pain attention I would say that what you know what the Missessie in position is it's about understanding of Human in societies human condition. It's not about explaining this goes back. It's not about covering laws Right. It's it's you know, these are kind of things like you were talking about before those are physics. We are what we study That gives us a sense in which we have the ultimate cause So the old you mean arguments about we don't know what the cause is of the billiard ball ball Whatever, we don't have to worry about because we know what the ultimate cause is the ultimate cause is the proposiveness of individual economic actors so could I rephrase it for phrase it this way that what is conceptually embedded in this idea of purposive action is If you unpack what we mean by humans act in accordance with their preferences and they have that implies a logically tight Theory for explaining economic phenomena, right? Would you say that's a fair way of phrasing? Yes So the way I what I stress to you know audiences or whatever is that? I think there's three different realms of economic knowledge One of them is pure theory. This is what you and I have been talking about In pure theory the if the reasoning is correct The propositions are necessarily true. Okay, but when then we have an issue called which we call applied Theory, which is where we take our But okay, so let me go back the pure theory is Necessarily true, but it's also very limited in some scope as opposed to from soup to nuts right and so I think we're a lot of young people that are excited about Austrian economics make a mistake is they go from the pure theory to a very applied theory without Recognizing that they've stepped into a different realm and so then they make these claims about the necessary Truthness of this for looking out the window when we haven't really established that yet But what we have established is that Individuals are going to arrange their means to obtain their ends as most effectively as they possibly can right and that they live in a World of uncertainty and so therefore it's all future oriented and all these kind of things like that So I have this core theory then what I do is I put it in different Institutional context so what that does is it doesn't change the fact that individuals are rational What it does is that rationality manifests itself in a variety of different Situations and the details matter because that's where the context of the decision-making takes place So acting rationally within a private property system is different from acting rationally within an attenuated property system Right, it's not that you're no longer acting rationally It's just that you're no longer can manifest your rationality the same way you would under this system And so again under the say let's take Austrian business cycle theory, you know Let's think about all the institutional specifics that are now being added to the picture We have a monopoly supplier of the currency, right? That's able to try to manipulate Interest rates, right? And so we have a modern credit transmission mechanism Which with savings is becomes investment funds for others So we're not talking about like the way in which banks were organized in the year 1300 right or we're not talking about sort of the way maybe Sort of banks might have been organized in a in a in a small community of pure barter or something We're talking about an industrial economy with a banking system where you have a financial intermediation In which savings of some become investment funds for others that that's mediated through the interest rate The interest rate creates a market for loanable funds I as an investor engaging in project go and look at the interest rates as part of my cost of my engaging in my activity And now like let's play out the story, right? And then all of a sudden the awesome so the Austrian theory under those conditions with the idea that the government had significantly or systematically manipulated the money and credit below the market clearing levels is going to lead to a boom in a bus cycle and So that's going to manifest itself in that world But if all of a sudden I started thinking about a world that was different than that it would manifest itself in a different way That's all I'm saying. Let me ask you a question specifically on that. Would you say so what you said is Given the specific institutions that we find ourselves in this boom and bust cycle is going to happen now If you if the government had pushed the interest rates below the market clearing rate Yeah, is that conclusion which is a statement about the world though kind of in the abstract is not saying this group Is going to fail or this company is going to make rep is that conclusion that you state with confidence? Is that something you're saying this is logically necessary because there's all these other? That's a great question. It's a it's a complicated question So I think that again if you go back to the earlier point about sound reasoning versus just validity Is that if the various different premises which I would include the details of empirical knowledge that are in there are in place and We don't make a mistake in our logical chain of reasoning that then it actually would be like a necessary outcome of that But again magnitudes push us in a different direction. So Once we started asking questions about magnitudes. We're really doing history so we could say for example if some Magnificent technology was created in the process of this boom and bust We might actually are the objective standard of living might still be going up Although all this would be happening behind so I use this example all the time It's great point that you're raising because I think that's describes the 20th century Is that that what we've had is is so I this is a colloquial again? Not philosophically serious, but I use this distinction between what I call a horse race between a The Smithian gains from trade So so technically if you think about this I'm drawing with my hand now But imagine that we have a total factor productivity curve and what can bump that total factor productivity curve up? That is how much bang do we get for the buck that we invest in thing? How you're going to do that is you have increases in trade or you have increases in technology? That's going to shift this thing up So now do against the this trend line do an oscillation of a boom and a bust And so what you're going to see is you're going to see it's oscillating against a trend Then you're going to do it again in another trend as long as trade and technology are increasing Tomorrow's trough is going to be higher than today's peak even though we're still going through this mess of a boom and a bust cycle I would say that's 1950 to 2009 basically is what what we've witnessed So the way I tell this all the time is that imagine that you're doing a horse race between a Horse named Smith and that represents the gains from trade a horse named shump hater And that represents the gains from innovation technological innovation and then a third horse, which is called stupidity And that's you know government doing these stupid policies as long as the Smith and shump hater horse are ahead of the stupid horse We still get better off But the reality is is that there's been a lot of cases Venezuela the Soviet Union, you know Africa where the stupid horse has curtailed the ability of the shump hater horse and the Smith horse to win out And so I think now what's wrong for people like you and I how this becomes possible or difficult for us to reason is because We're reasoning in the counterfactual exactly and that becomes really hard for us to convince other people that the re that we got the EPA and We still grew and so therefore the untrained mind says oh EPA therefore we grew rather than EPA in spite, you know kind of thing and so this is the old boss the odd point about What is seen as one is unseen and the untrained mind always looks at what is seen they see EPA growth? And we're like no the you know that that that made it worse off We could have been that much better and by the way We actually probably could have gotten better environmental quality had we just experienced real economic growth and the technological gains Because one of the great advantages of technological improvement is that you take what previously was waste and you turn it into Productivity so you don't need government to tell you that right and so but you know that argument is so hard for us to communicate especially to a Generation that believes that science equals measurement right and so we have a uphill battle to fight And we just have to keep taking different bites of the apple when we're fighting it Really like the analogy with the the horse race and in my mind I was thinking it's kind of like the horses are facing opposite directions and they're tied to each other Yeah, so like in the Soviet Union you had the incompetence that was outweighing the progress And then maybe in the United States I'm gonna borrow that from you I use I say that the horse the stupid horse can be nasty So it's biting at the heels and the ears of the other horses and sometimes they stop running because they're dead You know But I think that that you're right that what's happening is whether or not the horse moves in opposite direction By the way in our current context, I think this is what people are confusing with the great stagnation thesis exactly I think what's happened is that the government horse has gotten so stupid and so Constraining of our gains from trade and our gains from innovation that what appears to be a stagnation because they claim the rate of technology technology is slowed That's not possible like you were talking about on your trip. You know the human imagination is the greatest resource It's we haven't seen the beginning of what the influence of nanotechnologies are or anything like that But what we've done is we've made it so costly for people to innovate these things into the market that what you're seeing is the rate Of innovation is being slowed because of the government regulations and so the stupid horse is biting So we're still getting better Tomorrow than we are today But not at the same way that we were say between the period of 19, you know 55 and 1980 or something like that and or between 1980 and 2000 if you just think about these things like what a cell phones I'm holding a cell phone up, you know, like I always kid around with my with my students And I use the example of Dallas and you know, they don't even know what Dallas is anymore the TV show the old TV show And I say, you know Victoria principal got killed on Dallas, right? And turned out she didn't get killed but she was in a contract dispute So they killed her off on the show and the way they killed her off was she was talking on her cell phone But so she's the richest woman in the world and her cell phone was the size of this like notebook, right? And so of course she smashes the car now you sit in a classroom and the kids have every kid has a cell phone That's wired and you know, it's amazing But that used to be only for the very very wealthy right now. It's widely available to everyone That's amazing technological progress. We should expect to see that and you know going back to your point about macro and stuff In a world that has had that kind of technological innovation The fact that we haven't actually had a decline in the price level Suggests that we've actually been experienced a lot more inflation than what we officially count because in a world where Technology is constantly improving. We should actually see the real cost of goods going down not Staying the same or going slightly up and that is very important for understanding the measuring of the green span Fed which was an inflationary Manipulation of money and credit and which caused then the current crisis that we had but people look at it And they're like, oh, but you know, that's not the inflation rates like we saw in the 70s And it's like but yes, actually it was green span put is that he deviated from the sort of general rules about where interest rates should be They push the interest rates down They stimulate it and they go all got sent in a certain direction because of another set of public policies So this goes back again to the empirical point. I can tell you that there's gonna be a boom and bust But the particular manifestation of the boom and bust is gonna be a function of a lot of institutional details That's what I want to focus on. So let's take this. I really want to do want to focus on the empirics versus the theory Let's take this back with the minimum wage. Would you say the question of the minimum wage in the real world is one of Applied economics or is this still in the realm of pure choice the logic of choice? So Understanding the Disemployment effect is an issue of pure theory Yeah, understanding the particular manifestations of the Disemployment effect is in matter of applied economics, which is more of an art. So I so let me go back to my thing So I have pure theory. I've applied theory and then I have history History is all the things that people talk about which could be public policy economics It could be empirical like testing whatever they call it They don't test it but like it's useful to sometimes know what the correlation is, you know between, you know Trade policy and growth of a country or something like that But that's not testing the theory either the applied or the pure what it is is it's just History which is guided by these two other theory kind of ideas. So but I think it's a legitimate realm of human Scientific inquiry, which is history empirical information call it something like a study of the the magnitudes Yeah, in a sense. Yeah, but so so you have the the sort of the pure logic of choice and That gives you the basic Scaffolding, right? So, you know one economist Describe this as a difference between the skeleton and then all of the things like, you know Putting the muscles and the veins and everything else and then eventually the skin, right? And so the way I think about it is is that so this again another Kind of very common sensical thing. So do you remember in Harry Potter when Harry Potter? You know broke his arm when he was playing, you know And then the the one wizard comes over and he says I'll fix your arm And then all of a sudden he takes the bones out and Harry's arm just flops around like this This is what happens to people that don't have economic theory. They just flop around and so you have to have the bones That's done in the pure theory then what the applied theory is is it adds some other things in there Which is like maybe the Circulation system of the human body and things like that and then you get history and then you start getting more, you know empirical Knowledge about your makeup, right or you know, whatever and so it's that kind of move from the pure bones But what you can't do is you can't do here without having the bone structure So that that's the area I want to focus on because you're right I think a lot of confusion in Austrian self-described Austrian economic circles is is Conflating these categories. So I want to kind of take a more devil's advocate position about the logic This area of pure logic. So let's say that we can logically conclude that there's going to be some Disemployment effect from the minimum wage. You agree with that? What if I were to say There are in the real world in all circumstances When you have something like the minimum wage you raise the cost of employment It's the only thing that's changing is never just the cost of employment There's also people's beliefs change. So somebody might make the case to say, oh, well, in fact, I've seen people say this They say well when somebody gets the minimum way, they have a raid raising the minimum wage They get paid more they start being more productive because they're more they feel like they're a more competent worker And therefore that offsets all these things. How would you respond to that? well, okay, so a couple things about that One that reverses the causation between wages and and work effort. So this is what they in Economics, it's called what if price influence quality, right rather than quality being the factor that influences price So they try to flip the causation arrow, right? So for those of us who work within sort of more standard older economics what Henry Haslett used to call orthodox economics We see wages as a function of the marginal productivity of the workers Not the marginal productivity being a function of the wages. Is that a a connection that you're claiming is logically yes Okay, I would I would argue that I might be on some sketchy ground with that But I actually think not so much because it's an issue of how is that where do these wages come from, right? And we have to recognize that wages are simply a price for a scarce resource that we get through exchange ratios in the market and Just because I pay You know a hundred dollars. Let's say for this pen. Let's say that you say to me Hey, I'm gonna sell you this pencil for a hundred dollars and I pay That hundred dollars for the pen that that pencil it doesn't mean that that pencil necessarily You know is now going to be a hundred dollar pencil It's that I might have made an error in my estimation of the marginal value of this pencil Certain times of course, you know, this is where it gets complicated certain times this pencil might be worth a hundred dollars Let's say I had to sign a document and I don't have anything around and you're like holding it there And I need it and I can't like I got a sign in blood or some of the pencil and you say look I'll give you this pencil for a hundred dollars like gladly, right? so I'm just and again the pencil doesn't have any objective properties But but the idea that what we what this is calling is that the pencil will Indaginously react to the price that we pay for it I think is different from the idea that the reason why I'm willing to pay for this pencil a certain price is because You're willing to pay for that pencil for another price and that's competition You know, we do not compete with labor doesn't compete with management labor competes with labor right and so labor is trying to compete with labor to get that job and So management is trying to bid Among the labor and it's in that negotiation price that so now let's go back to you know this story if I am going to produce for that firm only $3 an hour if the more if the If the boss decides to pay me $5 an hour, he's losing $2 every hour. He would like to bid me down to a penny an hour Right, but the reason why I don't take a penny an hour is because I can go across the street and make a dollar an hour And then if I don't kind of do a dollar an hour, I'm gonna go here, right? And so it's this interaction between the the bids and the ass that are gonna end up by determining And so that's why the price formation process is connected to this marginal productivity theory of wages But that sounds I mean I very compelling, but it seems like it's a logical possibility to imagine a scenario Where somebody gets a raise as entirely as a function of the minimum wage and they think wow I'm a more valuable employee and then that changes even not maybe not explicitly, but it implicitly changes psychological benefit a lot of people claim that Henry Ford Overpaid his workers in what they call an efficiency wage. This is what this argument is and That Henry Ford wanted to make sure he cut down on turnover and other kinds of issues So he paid his employees more than what they could get Alternatively and as a result he had a more productive workforce But you know that it that strategy actually is part of what constitutes the marginal productivity of the workers So this is what I so that is a market response. So the problem with the minimum wage is that what if I mean What if they priced it the wrong way, right? So Let's go back to what you're talking about logical conditions It's I would argue that logically I can do a strategy Right, which will say to me that I can offer a higher wage than is currently being offered But I can I'm gonna be constrained by the marginal productivity of what the new higher wage will give us Yeah, but you don't know that is beforehand. No market part There's a difference between market predictions and theoretical positions, right? So if I if I argue that so then the Henry Ford story I engage in these efficiency wages, well Really, are they efficiency wages because what's happened is because I've now created a more loyal workforce I now actually have a higher wage. I have higher productivity. Therefore justifying the wage. I'm still right That's enables. I'm not cutting into my I'm not raising my cost the minimum wage set by the government is a raising of the cost and The reason why I would argue That the kind of argument that you're running that you say people come up with isn't gonna work is because we don't actually know How to adjust that if the government has put a cap So if Henry Ford is wrong or right? He's gonna be suffer a penalty in the market And he's gonna have to adjust But if the minimum wage is wrong, there's no adjustment process being made But couldn't we say that it's a it is a possibility that you could might say the minimum wage is right It's ridiculous to think that they could just say oh, this is what at this particular price point You're going to get the additional Product tip from the worker. Isn't that a logical possibility in order to get the result that you're talking about it would have to be in the range between What the market would bear right rather than the idea right rather than the idea that it's a Like above the market binding price. So if you think about Bumbaverick's The way he does economics, right? He's gonna have these stair step demand curves Okay, and then you're gonna have like a stock curve, right? So the number of workers. All right, so This is different from a normal sort of discreet This is discreet unit rather than the continuous thing. And so what you're gonna have here is in price formation You're always gonna have like a range and so I think in markets. We have a range We don't necessarily have necessarily X marks the spot and what you're picking up is in that is in that range of Negotiations, but if you tried to set this wage above that then you would end up by getting the disemployment effects But if you're in here, let's say that I'm originally asking here and you're saying oh I'm gonna be an entrepreneurial You know employer and I'm gonna pay you here and I'm gonna get more out of you I think as long as it's in that range what it does is it's gonna bid that that price of labor up Right to get the more productive labor But if I go above what the market could bear then I'm gonna get these disappointed that's a good point But because they can't see that graph you let me rephrase that and see if you think this is a fair way to rephrase it what you're saying is That the logic the pure theoretical logical argument about why the minimum wage causes disappointment Has to do with raising the minimum wage Above market clearing price and it is conceivable that the minimum wage Would be raised to a point that is still within market clearing price and therefore you don't see the employment effects now If that's the case that then that makes sense based on preserving the logic of this couldn't somebody then say Well where that point is where the market clearing price is just an empirical phenomena So the minimum wage you can have an airtight argument for raising the minimum wage to $20 an hour Because that's going to raise people's productivity. Okay, so I think that what pure theory allows us to do is set these boundaries Which is that workers will not take jobs Below their opportunity costs so right and they won't and and employers won't hire people above their marginal revenue product Yes, but couldn't and any any decision hold on and any decision outside of that bounds is gonna end up by having You know consequences which will lead to a weeding out, right? So you won't be able to hire me anymore because you won't have any money in your bank and You know because you're making losses on every single transaction or I am not gonna be I'm gonna be passing on Opportunities at every every pass right, but isn't that kind of an admission then that? Like it almost seems like you've though I agree with what you're saying you're you've marginalized The impactfulness of economic theory because somebody could say well technically it's true But we may live in a world where government should raise it Raise them in ways of $20 an hour because we might be still within those boundaries. Yeah, so I think that okay So that I take your challenge I think again go back to the Harry Potter thing without those bones that established that we end up by having this Which is what I think is going on the debate, but the actual manifestation is a magnitude question And I do think that that is actually something we should pay attention to so if you go back to the The original card in Kruger study where they're looking at New Jersey, and they're looking at Pennsylvania I was teaching in New York at that time McDonald's in New York City was already paying like eight dollars an hour minimum wage and You know they were talking about a move from a six dollars to a whatever So, you know what are the different conditions and again, you know, they look just merely at number of employees Let go And it turned out by the way that one of the questions you had to ask was how many hours Was they working so whether or not so, you know, they pass them in on wage But they didn't cut back the number of workers, but they cut back the number of hours This is like this guy Newmark, you know went and redid the studies right away Now what's the status of that going back to our early epistemological questions? I don't think it affected the theory of the labor market But I do think it affects the way we talk about Public policy and the manifestation so we're over here in history What we're not doing is showing that the theory of economics is wrong We're showing particular illustrations and so I would just so You keep asking me about whether or not this affects the logical status of the laws Maybe I'm too blinded and too much of an economist in my own ways or whatever I don't see it as affecting the laws of economics I see it as affecting the Discussion that we would have about the illustration of the laws and public policy relevance So this is where I'm going with because I think this is the error that a lot of people and who might ideologically agree with us I think this is the specific error that they make It seems like This is opening the door at least theoretically to a central planners argument So a lot of people take the claims of Mises for example and they say it is logically impossible to have Socialism for these reasons because you don't get meaningful prices if we're saying well, it's possible but it's ridiculous given the Given empirical constraints isn't isn't that important so so for example What if I were to say what if I had the hubris to say well I am the central planner who knows Where are these ranges are and and for the sake of the economy? I want to set the minimum wage at x-level because that I know is going to result in a higher level of productivity and higher wages for everybody all right, so What I would say on that is that you know Mises his statement is actually a fairly Straightforward, you know argument without private property in the means of production There's no market for the means of production without market means production. There's no prices set no exchange ratios established No monetary prices without monetary prices. You can't engage in economic calculation You don't know whether or not to invest in project A or project B And I think and the example I give to students all the time trying to get them to really hone on this is I say write down a Present value calculation you've learned the formula in finance and area like that write it down and Now think about all the things that have to be true in order for you to engage in that calculation You know to be able to determine whether or not I should take a lump sum if I you win the lottery tomorrow Should you take a lump sum or should take the annuity driving out? How am I going to make that calculation? Well, you need to know about property. You need to know about security property You know about inflation rates sound money all kinds of things like that, right? So This is what Mises is highlighting on him. What he says is that without economic calculation socialist economy is Impossible meaning that the socialist economic system cannot allocate resources rationally from the point of view of This the allocation of scarce resources among competing ends so keep economic calculation does the following thing It sorts out from the array of technologically feasible projects those which are economically viable So like you got here today and you said you were driving the the moving truck You know, you could have gone here by a helicopter You could have gone here by a like a bicycle There's all kinds of different ways that you could have got here that were technologically feasible But hopefully, you know, you picked the one especially given that you have this budget and you're trying to figure everything out You picked the one that was most economically viable to do it. How did you figure that out? Well, you had to have a ray of prices. You have a budget constraint. You figure all this out So think about that, right? This is what Mises is talking about But what Mises didn't say is that socialism would then just sort of grind to a complete like Haughton do nothing so they would allocate resources based on what political power like so who are my friends? I'm gonna reward my friends and punish my enemies. Well, you know, that generates one kind of system I'm just gonna make everything be a technological problem. So that's why Ingsock in Orwell is always at war with either, you know You know Eurasia or whatever the different, you know other socialist countries that he's fighting with right And so they're always gonna be at war because I substitute the economic problem for a technological problem And I can appear to think like I solve the planners problem But I didn't really solve a planners problem from the point of view of rationalization of production I just allowed the planner to do something which is to exercise their political control over over the economic means in society Now, okay, so but Mises this point which is brilliant. I actually think it's the Most the single most important contribution of 20th century economics is Mises is 1920 article In my own opinion, that's you know, that's the greatest contribution not high ex use of knowledge High ex knowledge use of knowledge argument a very important argument, but it's a derivative of Mises's main argument and And so, you know, that's where I would put the beginning of all of this stuff I think it's important to recognize that like a country that claims to be Socialist but still has private property doesn't say face the same economic Calculation problem it faces other problems, which are Mises talks about as well Which is on a hampered economy and what happens in an hampered economy But doesn't space I think where they've abolished The exchange ratios for goods for capital goods, which is the key issue And so like Mises, you know that people always ask Mises like what would be Examples of you know, where would be an extreme socialism? What would happen? You know, what would be the kind of things that would be missing, you know One of them be the absence of a stock market, you know The absent for any market and capital goods, right? And and so the real socialist the market socialist model was somehow that I don't need to market for capital goods But I can have a market for consumer goods That's what the market socialist thought and then I can through ipso facto get the market the price for the capital goods And Mises and Hayek, this is where Hayek comes in because this is who he's arguing with even more than Mises is They're like hey, wait a minute. You can't do that unless you're in equilibrium conditions, right? So I can infer the price of a capital good from the consumer good price in equilibrium But outside of equilibrium I have to discover, you know, that price anew every day I don't know what the least cost technologies are So how am I ever going to come up with that and the answer always was by assumption, right? But you know if I have full and complete information of all technological possibilities and blah blah blah And so this is what was going on in the models So in the real world I look out the window the question is is hmm, you know Like I look out there all the time and there's like all kinds of government set prices for stuff, right? And does that mean that they are unable to act No, because remember the issue is not that they act but that they act Right socialist economy is impossible. That is are we allocating these roads? You know, we've priced these roads right outside of here We're doing a big project right now on the road that when you came in and the reason is is because they found a Civil war road and they're digging so now they're trying to go around and do all of that There's a ton of workers out there. They're all going in different directions They're doing something, but are they doing it in a economically rational way or an economically wasteful way? I think that we have good reasons to argue that they're doing it economically, you know Inefficient way though. They're doing it and there and how come this company got the contract and not that company And that opens up all the stuff having to do with political allocation versus economic allocation. Do you think? In terms of people who would claim that they have some economic understanding of the world I would be one of them. I would say yeah, I understand through the lens of like the economic way of thinking I understand I think on a large degree how the world works on politics and all that Do you think that in order to make such a claim you have to have this? Applied economic understanding or can you just be you can can you just study just the logic of act the logic of human action? Just get that economic theory You know you sit in arms here and you deduce this so I think you think about Henry Hazlett. Yeah, okay, so Henry Hazlett wrote that book in 1946 47 published in 47 It was a New York Times bestseller an amazing book and it's still like around we still read it But all of his examples are older examples or whatever But it just takes us as a reader to sort of say oh, yeah, the book still comes alive and you're like that But that's a book in applied economics and public policy And he doesn't really spend all that much time on the pure bones, right of it But the pure bones couldn't if they weren't there then you wouldn't have the oomph of the other stuff So I think for most people if you get the if you understand the pure bones you move really quickly to this issue of Simply trying to understand the world out the window rather than the world on a blackboard And that a lot of the debates within pure economics and in applied economics that are the esoteric properties of Academic guild right are kind of irrelevant for you know, the average Joe trying to figure out You know things and that the average Joe trying to figure things out actually might have superior knowledge to the the academic who's trapped in the guild and trying to make nuanced arguments about this this or this it's like a It becomes like a pure intellectual game. So, you know again, you know, you can't see this here But like I get one of the things I think about in my head is that if you study All the great thinkers in economics So imagine you have a picture of a globe and then you study Adam Smith and Karl Marx and you know John Baptista say and John Maynard Keynes and you know all the different thinkers mouth is whatever the key issue is that You should study their theories from them to the way they understood the world So you see an arrow going from them to the world But when you get into modern economics what you do is you just study the different theories Right and so you miss the world you end up by you know, so you understand Marx versus, you know Smith versus say versus Malthus versus Ricardo or whoever But what you don't do is you don't engage the world and so you end up in this kind of circle jerk around The edge of understanding the world and what we need to do is force people to gain engage once again back with the World rather than just around the only reason why I want to know about the difference between Marx and Smith Is because I want to know what that means for the seeing the world not just having but academics Has a lot of incentive systems for us just to tweak around on the edges of these these out here Without ever engaging in the world and I think this is um, I've always really liked this this phraseology from I and Rand though I don't take I and Rand's position on things, but she liked to say that you get caught between Free-floating abstractions and momentary concreteness And I think that that actually is what the biggest problem of modern economics is is that we get caught in these pure Theoretical debates not the kind of theories that you and I were talking about but these purely valid models that we are free-floating Abstractions, right and then we do these momentary concreets Which are like, you know to detail without any without the bones in them, right and that that's the two evils Right. It's what I call formalistic Historicism, right? So it's like you have a formal model that proves any goddamn thing in the world And you you know go out there in the world and then there's no like Overlining principles about what's going on and so what we want to do is we want to avoid those two things and finding out those set of thinkers That fall within that gap that avoid free-floating abstractions and momentary concreteness That's who you're going to find is like the useful Social thinkers so you mentioned economics in some sense You know if you take the true Misesi in position economics is just one develop branch of a more general science of basically what you would call social theory or what Mises calls praxeology, which is a study of human action in all our walks of life and so that Praxeological discipline avoids I would argue free-floating abstractions and momentary concreteness. Yes. I find that Cuz it kind of as an aside I find that you That distinction between the free-floating abstractions and the concretes is not just in economics is in every field of thought Yeah, most most profoundly in my own research is in mathematics where they've intentionally Divide to cut themselves off as though we will our conclusions do not apply to the real world right at all Oh, yeah, like explicitly, which I think is preposterous But you also said I want to highlight one thing that you said that when you focus on the logic The other stuff goes very quickly. So going back to your minimum wage you look at there and you say, oh, yeah These workers got you know a higher wage now. Well, but what are the consequences that as a result of that? What are these secondary? Consequences and then you start talking about Disemployment and all these other kind of things like that rent controls I establish a rent control, but then 20 years from then I have a like a slum like how did that happen? I I read you know I made sure that the least advanced in society were supposed to be taken care of by lowering the rent Well, then you know what happened to maintenance of those apartments, you know the supply of the apartments all that kind of stuff Like that changes and so I think that if we can get students to think in terms of the pure logic and then you know see the nuances that are associated with Putting more and more flesh on the thing and then the actual real world Examples in policy but always guided by that and if you don't have those bones You're gonna end up by being Harry Potter without an arm Yeah, and that and that that's really I'm glad we got to focus on was that relationship between the theory and the data Because we as you well know we live in an intellectual culture, but not only overlooks theory Dismisses it. Oh the whole big data exactly not movement is crazy. I think it's completely backwards I had a guy the other day that was accusing me. I was accusing my philosophy said man You're stuck in the 19th century or at the 20th century as an insult. I said no I'm stuck in the 19th century. Yeah. Yeah, that because that they the Rationalist method of let's get our concept sorted and in order. Yeah, and then we'll go out and try to interpret what's going on I think that's incredibly important. Yeah, so I think that's a fair statement about, you know, what's going on I think that when we engage in debates with people that affect real-world topics minimum wage rent controls trade restrictions Cuba, Venezuela, you know these kind of things, right? that There is a kind of important issue of having to see Certain conceptual clarity and part of that conceptual clarity is definitions. So a lot of people don't see Disemployment unless they see workers no longer working and The reality might be is that the conditions under which the workers are working have changed So this is very important to recognize that in the real world that Employers may in fact make adjustments on multiple margins and we need to be pay attention to all these multiple margins That employers are working on to see the disemployment effect So what I'm saying there is that conceptual clarity allows us to actually see Things that lack of conceptual clarity won't let us see and so that's why I like to use the metaphor of eyeglasses Can we push it even further? Can we say that conceptual clarity allows you to conceptually understand what you cannot see? Yeah, well, that's yeah, that's the unseen that's seen in the unseen But like the reason why I like the metaphor of the glasses is one I have found in in my teaching career that The common sensical notion that you need eyeglasses to be able to read It doesn't cause the same thing as if I spent like 30 minutes talking to them about the pure logic of choice I just sort of say okay. Look, you know, I right now this is how I start I can't see very far and I say, you know, you guys this is principles right you kids in the back of the row I can't really form like you're I know that you're there's a there's data out there But I can't really form like what you look like, you know what you're who you are and anything like that I put on these glasses and now all of a sudden you're in sharp relief. You're brought in the sharp relief This is what economics does for us right economics is this set of eyeglasses and by that I mean basically the whole messesing and logic of choice kind of position This is a set of eyeglasses and once I put it on I'm now able to see you back there without this on All I know is there's a buzz so in some sense without theory There is a bunch of data, but I can't make any sense out of it theory allows me to then interpret that data and make sense of it That's a very very common Sensible effort to try to get at a very deep philosophical issue. You've been asking me about the deeper Philosophical issue. I agree with you That those issues are Important that we need to be working on those and that we need to get in Continually refine and improve our arguments with those against others You asked me the question about talking to others in our intellectual culture in general and I wonder if our intellectual culture in general Is more ready to accept the eyeglasses than the deeper philosophical position But the question I think that you're right on This is something that like Rand also stressed and everything like that, which is that at some level It's always going to come back to those fundamental philosophical issues, right? I think it's a wonderful note to end on I want to thank you again very much for sitting out with me I wish you the best on your trip and I can't wait to hear you when you get back about all the adventures that you've had and the things that you've learned and you know keep in mind that Sometimes the best teacher of philosophy and economics is life And you can learn a hell of a lot, you know besides the books And but it will help form the books and look forward to reading your books in the future. Thank you All right, so that was my conversation with Dr. Pete Betke of George Mason University We talked a lot about Ludwig von Mises and if you guys aren't familiar with this thinker I suggest googling him and learning about him because at least in my circumstance He was one of the reasons I actually got drawn into philosophy and in a epistemology in the study of logic Which for me is now kind of my the central area of my own research If you're ambitious and you want to take on a big book then his seminal work is called human action I'll have a link to that in the show notes page, which is Steve dash Patterson comm slash Thirteen and if you make it all the way through the book, I can pretty much guarantee It will be impossible for it not to change your worldview in some meaningful way. All right, so that's all for this episode I hope you guys have a fantastic day